Dienstag, November 18, 2008

A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world’s energy watchdog said on Wednesday.

The International Energy Agency warned that cuts and delays in investment that were prompted by the fall in oil prices and the credit crunch had put the world “on a bad path”.Financial TimesIEA warns of new oil supply crunchCarola Hoyos, Ed Crooks and Javier Blas, Financial Times, 12 Nov 2008

A lack of investment in new sources of oil risks a supply crunch worse than the problems that pushed prices to $147 a barrel this summer, the developed world’s energy watchdog said on Wednesday.

The International Energy Agency warned that cuts and delays in investment that were prompted by the fall in oil prices and the credit crunch had put the world “on a bad path”.

Fatih Birol, chief economist at the IEA, said: “We hear almost every day about a project being postponed. This is a major problem.”

Last year, $390bn (€311bn, £259bn) was invested in oil and gas exploration and production, one of the highest amounts in recent years. Yet it still fell short of the $450bn the IEA said would be needed in both sectors.

There was no respite for the IEA in oil prices on Wednesday. West Texas Intermediate on the New York Mercantile Exchange dropped to a 20-month low of $56.35 a barrel, down almost $3, after the US department of energy said demand would remain flat for 2008-09.

Oil prices have fallen as economies have struggled in the credit crisis and demand has dropped, especially in the developed world.

The IEA predicted that shrinking demand would be a long-term phenomenon among members of the Organisation for Economic Co-operation and Development. “We think OECD oil demand has peaked. The OECD countries’ role in the energy world is becoming less and less important,” said Mr Birol.

Developing countries are expected to be the only source of growth in oil demand until 2030, with China contributing 43 per cent and India and the Middle East each about 20 per cent. The remainder will come from other emerging economies in Asia.

But meeting the demand growth is secondary to the big challenge of compen­sating for the fast-declining production from the world’s older fields, the IEA said. It suggested the oil price was too low to guarantee the necessary investment and noted that high-cost ventures, such as Canada’s tar sands, were producing oil at a cost of about $80 a barrel – more than $20 higher than the prevailing oil price.

The warning represents a change of tone from an organisation that has often criticised the Opec cartel of oil-producing nations for reducing production to prop up prices.

The main spur for the IEA’s focus on investment – and the oil price that it regards as necessary to stimulate investors – has been its exhaustive study on the rates of decline in production from 800 of the world’s biggest oil fields.

The watchdog found that even after recent investment, production from the fields was declining at an annual 6.7 per cent and that this rate was accelerating. This means 45m barrels a day would have to be found and tapped in the next 22 years simply to meet an unchanged world demand. As it stands, however, the IEA expects demand to rise from 85m b/d last year to 106m b/d in 2030, making the challenge that much greater.

Many of the fields experiencing the sharpest decline in production lie in developed countries, including in areas such as the North Sea and Alaska. This meant the west would become less and less of an influence in terms of production, while Persian Gulf countries would become more important.

The IEA said most of the projected increase would come from members of Opec, whose world share would jump from 44 per cent to 51 per cent by 2030.

“Their reserves are big enough for output to grow faster, but investment is assumed to be constrained, notably by conservative depletion policies and geopolitical factors,” said the IEA.

Petrobras, the Brazilian state oil company, said production this year would be 500,000 b/d lower than previously forecast.

Guest Commentary: Dr. Richard Miller

The IEA is getting rattled by events. For some years, the IEA, EIA and OPEC all maintained the view that oil resources are so large that they must be sufficient to maintain supply. Other leaders in government and industry uncritically accepted that position, and stopped worrying. But the IEA has now broken ranks, to accept that there is a looming problem of supply, even from the large remaining resource. Current trends in energy supply and consumption, in their own words, are patently unsustainable, as ODAC has maintained for some years.

The IEA is clearly uncomfortable with this new position. Some of their forecasts don’t look likely, and some assumptions are implausible, but these are what the IEA finds are required to maintain supplies to 2030. For example, an average oil price of $100 (in 2007 dollars) between now and 2015 might come to pass, but it’s hard to see it only rising to $120 by 2030. Total oil supplies will rise, say the IEA, by 22 million barrels/day by 2030, but only 5 million of these barrels will be conventional crude (production of which will have levelled off by then – so the global peak of conventional crude is now within the IEA’s sight, even though they don’t say so). The remaining rise will have to come from gas liquids, oil sands, synfuels and other non-conventional resources.

The IEA still leans heavily for comfort on the supposed mere existence of enormous resources as evidence for future supply. ODAC would question the details – resources are definitely not reserves for one thing (not even close in some cases), and even the USGS is now finding it hard to believe its own estimates of over 700 billion barrels of yet-to-find recoverable oil – but that is to miss the crux, which is that peak oil is going to be a supply problem, not a resource or reserve problem. So when the IEA describes a potential total resource of 9 trillion barrels of liquids from fossil fuels, or 8 times more than we have already burned, there is a completely misleading comfort in the well-padded pabulum of fat round numbers.

The harder truth from WEO 2008 is that the world needs the equivalent output of 6 more Saudi Arabias by 2030, and in ODAC’s view they probably don’t exist. The desired supply increase of 22 million b/d by 2030 would actually require 64 million b/d of new production by then, because of oil field decline. Daily production from every field peaks and then starts to fall, and this tends to happen before they have produced even half of their reserves. Decline has often been ignored altogether, or else ridiculed as nugatory by such as Cambridge Energy Research Associates, who in January dismissively calculated a global decline rate of 4.5% p.a. from the world’s producing fields. The IEA’s analysis is rather different, and probably the main trigger for their change of stance. They find decline to be 6.7% for post-peak fields (which is most of them), or 50% higher than CERA found. Worse, this rate of decline could increase to 8.6% p.a. by 2030. And worse again, that’s the decline rate when it’s mitigated by active investment to maintain production.

Under the IEA’s scenario, the investment required is $350 billion annually. That’s actually less than we currently invest. The catch is, most of the cash needs to be invested in OPEC, and specifically in the Middle East. Will OPEC invest so much, or allow anyone else to invest it? What would be in it for them, if they were to plunder their own national endowment in a few decades, for money that wouldn’t buy much in a devastated world economy and a devastated world? The IEA makes a rather ineffectual pitch for partnerships between the oil majors and OPEC states, but the mutual benefits suggested are far from compelling. The oil majors may indeed have the necessary skills, technologies and staff that OPEC lacks – but why would OPEC want them? Nowhere does the IEA make a compelling case for OPEC falling into line with the wishes of the OECD.

It’s good to see the IEA taking a firmer line on their modelling, which over several years has increasingly analysed what is possible from the bottom up, rather than simply measuring top down from the expected demand and calculating how much oil would therefore be supplied. It’s also understandable that this change is going to be a journey for the IEA. And ODAC feels that market and industry developments are very probably going to make an uncomfortable truth very apparent within the next few years.

Dr. Richard Miller is an Independent Consultant, and former geochemist for the BP Exploration Department

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